Important COVID-19 Updates. Click Here to Learn More
Close Popup Icon

May 17, 2019

An Investor’s Guide: Alternative Investments Explained

Most of us are familiar with the stock market. But have you ever wondered what the institutions and high net worth individuals are investing in? Alternatives.

We’re here to break the news to everyday investors—stocks and bonds are not the only investment vehicles out there! From art to coins, farmland to venture capital, natural gas to real estate, alternative investments are becoming more accessible and continue to be a sought after addition to one’s portfolio.

So what are alternative investments, why are they important, what are the advantages and drawbacks, and how can you get started? This article will discuss all of that, as well as take a deep dive into 5 of the most common alts that individuals can invest in–and not just the wealthy.

Table of Contents:

  1. Defining Alternative Investments
  2. Different Types of Alternative Investments
  3. The Importance of Alternative Investments in Your Portfolio
  4. Advantages and Drawbacks of Investing in Alts
  5. Getting Started with Alts

1. Defining Alternative Investments

Simply put, alternative investments are an asset class that doesn’t fall into conventional investment categories such as stocks, bonds, or cash. Alternatives, commonly called “Alts,” are outside of the stock market and they are available for institutions as well as individual retail investors to access.

2. Different Types of Alternative Investments

As mentioned, alts are the investments that don’t fall in line with equities, fixed income, or cash equivalents. They can include:

The list of alternatives could go on and on. We’ll discuss 5 of the more common options in more detail below.

3. The Importance of Alternative Investments in Your Portfolio

Alternatives are an important component of a well-balanced portfolio. They offer the potential for high returns as well as protection from the volatility of the stock market. Below are some of the top reasons why adding alts to your portfolio can pay off.

4. Advantages and Drawbacks of Investing in Alts

Investing in alts, like any other investment, has advantages and drawbacks. It is important to identify whether or not one of these non-traditional options works with your risk tolerance, investment timeline, and overall objective.

As mentioned, alternative investments can provide protection, diversification, and higher-than-average returns to investors. Another advantage is that they oftentimes have unique legal and tax considerations that can be highly leveraged.

In addition to potential tax benefits, alts allow individuals access to investments that were once off-limits. Most alternatives were once exclusive to the wealthy and the institutions, now these new and sophisticated investment vehicles are being accessed by retail investors.

The drawbacks of investing in alternatives may include the potential for higher risk and loss, lack of transparency and regulation in some cases, access, accreditation requirements, and illiquidity. Not all alts are illiquid, however, many are more in line with a long-term investment strategy. It is important to remember that with the right research and partnering with an SEC-regulated sponsor, many of these drawbacks can be overcome.

5. Getting Started with Alts

The first step in adding alts to your portfolio is to identify which opportunity interests you the most and works with your current financial situation, risk tolerance, and timeline.

Accessing alternative investments will vary with each opportunity. In order to reap all the benefits of alts, one must typically possess some sort of knowledge or expertise in the area they are investing in and have a clear assessment of all the variables at play. Without proper knowledge of the specific markets or trends, embarking on alternatives can lead to higher risk.

Some of the above-mentioned alternatives can be accessed on your own. Some people prefer to access these investments through a wealth management firm specializing in the area. Individuals can also access alternatives through funds specializing in the asset. For example, DiversyFund allows individuals to invest in their Growth REIT, a portfolio of commercial real estate assets. Funds like this allow investors looking for alts to skip the hassle of being an expert in the field.

Another consideration when investing is deciding where you will get the capital to start. Oftentimes, individuals can use their retirement accounts such as an IRA or 401(k) to invest in alternatives.

Conclusion

Because of their potential for high returns, diversification, and mitigation from current market volatility, it’s a safe bet for investors to allocate a portion of their portfolios to alternatives.

With the continued demand for more of these investment opportunities, it’s no doubt that we will continue to see companies bringing alternative investments to the everyday investor.

 

Sign up for investment updates, articles, & exclusive offers